The fall of Fannie Mae

| September 6, 2008

Today’s New York Times reports that the US government plans to take over Fannie Mae and Freddie Mac:

WASHINGTON — Senior officials from the Bush administration and the Federal Reserve on Friday called in top executives of Fannie Mae and Freddie Mac, the mortgage finance giants, and told them that the government was preparing to place the two companies under federal control, officials and company executives briefed on the discussions said.

The plan, which would place the companies into a conservatorship, was outlined in separate meetings with the chief executives at the office of the companies’ new regulator. The executives were told that, under the plan, they and their boards would be replaced and shareholders would be virtually wiped out, but that the companies would be able to continue functioning with the government generally standing behind their debt, people briefed on the discussions said.

It is not possible to calculate the cost of any government bailout, but the huge potential liabilities of the companies could cost taxpayers tens of billions of dollars and make any rescue among the largest in the nation’s history.

I can’t say I’m surprised. I spent two years as a senior IT consultant at Fannie Mae in the late 1990s, and it was clear even then (and even from my position) that there were some serious disfunctionalities within the organization. Most notable was the drive by top management to achieve (at almost any cost) double-digit growth in earnings, year over year, each quarter. It was a mindset that permeated the company. It helped drive the stock price up from just over $30/share when I arrived there in 1996 to nearly $90/share in 2001 (here’s an interactive stock price chart), and with good reason: Fannie was highly profitable (if I recall correctly, on the order of $1 million in profits per employee per year [before taxes] while I was there in the late 90s).

However, growth like that is hard to sustain quarter after quarter, year after year. The effort to do so appears to have led to the fradulent bookkeeping that eventually got Fannie Mae in trouble a few years back and cost CEO Frank Raines his job. I suspect it also led to Fannie’s flyer into subprime mortgages, which has led to massive losses and the collapse of Fannie Mae stock prices down into single digits (just over $7/share this morning, pre-opening). And now it’s led to the US government taking over Fannie Mae, and a massive bailout by the US taxpayers.

Ouch.  ..bruce w..

P.S. I suspect my co-blogger, Bruce Henderson, may have more to say on the matter.  Or maybe not.

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Category: Credit Backlash, Economics, Main, Recession Watch, US Politics

About the Author ()

Webster is Principal and Founder at Bruce F. Webster & Associates, as well as an Adjunct Professor of Computer Science at Brigham Young University. He works with organizations to help them with troubled or failed information technology (IT) projects. He has also worked in several dozen legal cases as a consultant and as a testifying expert, both in the United States and Japan. He can be reached at, or you can follow him on Twitter as @bfwebster.

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